Over several years, the federal government illegally collected an Obamacare fee from Kansas and now must repay the state more than $142 million, a federal judge ruled August 21.

Kansas Attorney General Derek Schmidt and five other states sued the federal government, arguing that the Health Insurance Provider (HIP) Fee – one of the numerous taxes and fees imposed by the Affordable Care Act, or “Obamacare” – was being illegally collected from their state treasuries. Federal law expressly prohibits the imposition of the HIP fee on states, but in states like Kansas that contract with private managed care organizations (MCOs) to operate their Medicaid programs, the federal government imposed the fee on the MCOs, then adopted a regulation requiring the MCOs to pass the cost of the HIP fee through to the state.

“The whole scheme was a two-step sleight-of-hand that had the effect of forcing states like Kansas to tax its citizens and then send the proceeds to the federal government,” Schmidt said. “We’ve thought from the beginning this was one of the illegal provisions of Obamacare, and yesterday the federal court agreed.”

Federal District Judge Reed O’Connor had previously ruled in March that the regulation mandating the MCOs pass the cost of the HIP fee through to the states was illegal, but at that time he declined to order the federal government to refund to the states the money it had illegally collected.

Kansas and the other states asked Judge O’Connor to reconsider, and yesterday he did. His revised ruling requires, as a matter of equity, that the federal government disgorge the ill-gotten proceeds from the illegally collected tax by returning the wrongly collected money to the states that paid it.

In total, the order requires that more than $839 million be returned to the six states that brought the lawsuit. The Kansas share of that is $142,121,776, which reflects the total amount Kansas taxpayers paid because of the illegal HIP Fee pass-through for 2013-2015.

Yesterday’s ruling is likely to be appealed by the federal government.

“This lawsuit is ongoing,” Schmidt said. “Kansas budgeters should not bank on this money just yet. But yesterday’s ruling is well-reasoned and puts us in a much stronger position as our case goes up on appeal.”

The next stop for the case likely will be the U.S. Fifth Circuit Court of Appeals in New Orleans. In addition to Kansas, the states that brought this lawsuit are Texas, Indiana, Louisiana, Nebraska and Wisconsin. The case is Texas v. United States, No. 15-cv-151 (N.D. Tex.). The ruling is available at https://bit.ly/2MCLGOv.